Using bank payment obligation, lessons for vietnam,khoá luận tốt nghiệp

Name : Pham Thi Thuy Tien Class : K19KDQTC Course : 2016-2020 Student ID Superviso r : 19A4050235 BANKING ACADEMY FALCULTY OF INTERNATIONAL BUSINESS : Dr Nguyen Thi Hong Hai BACHELOR’S THESIS USING BANK PAYMENT OBLIGATION, LESSONS FOR VIETNAM Hanoi, June 2020 ACKNOWLEDGEMENT Thesis is completed at Banking Academy of Vietnam During the process of accomplishing the study, I have received much help from people, and I would like to express my gratitude to them My first special thank goes to my supervisor, Dr Nguyen Thi Hong Hai Without her support this thesis would never be completed This was the first time I have an opportunity to work with her, and through out the period of study, I learned from her the professionalism in working such as caring even small details to make the study polished Her encourages and asking after had such positive effects on me and I appreciate that so much Once again, I am grateful to Dr Nguyen Thi Hong Hai for all her supports and advices I would present my thanks to all the teachers in Banking Academy of Vietnam, especially teachers of Faculty of International Business, who teach my valuable base knowledge during the period of university study Due to the limitation of accessing and time, the thesis could not avoid the imperfections Therefore, I look forward to comments from teachers and the judgement council Student i DECLARATION I assure that “Using Bank Payment Obligation, lessons for Vietnam” is an independent study of my own research under the guide of Dr Nguyen Thi Hong Hai Data used in the study are honest and have clear origins with fully references credited I would take all responsibilities for my own thesis Hanoi, June 2020 Student ii TABLE OF CONTENT ACKNOWLEDGEMENT i DECLARATION ii TABLE OF CONTENT iii LIST OF ABBREVIATIONS v LIST OF TABLES .vi LIST OF FIGURES .vi INTRODUCTION CHAPTER ONE: THEORETICAL REVIEW 1.1 .BACKGROUND OF BANK PAYMENT OBLIGATION .8 1.1.1 Definitions of Bank Payment Obligation 1.1.2 Popular terminologies related to an BPO operation 1.1.3 A typical transaction flow of using BPO 16 1.2 BPO, L/C AND OPEN ACCOUNT .19 1.2.1 .Overview of Open Account, Documentary Collection and L/C 19 1.2.2 Comparison between BPO and other method of settlements 21 CONCLUSION OF CHAPTER ONE .30 CHAPTER TWO: THE SITUATION OF USING BPO IN VIETNAM 31 2.1 THE SITUATION OF DEPLOYING BPO IN VIETNAM .31 2.1.1 .Legal resources governing BPO transactions in Vietnam 31 2.1.2 .Reality analysis 34 2.2 CHALLENGES WITH DEPLOYING BPO IN VIETNAM .37 2.2.1 .Technology infrastructure and legal requirement iii CHAPTER THREE: RECOMMENDATIONS LIST OF ABBREVIATIONS TO USING BPO IN VIETNAM AND CONCLUSION 41 3.1 DEVELOPMENT ORIENTATION OF USING BPO IN VIETNAM TO 2025 41 3.1.1 .Development orientation of using BPO in Vietnam 41 3.1.2 SWOT matric analysis of deploying in Vietnam 41 3.2 RECOMMENDATIONS TO USING BPO IN VIETNAM .48 3.2.1 Solutions for BPO implementation 48 3.2.2 .Suggestions 51 3.3 CONCLUSION 52 3.3.1 Achievement Abbreviation 52 Full meaning B2B Bank-to-Bank BIC8 8-digit Business Identifier Code BPO Bank Payment Obligation C2B Corporate-to-Bank D/A Delivery against Acceptance D/OT Delivery against other terms and conditions D/P Delivery against Payment FAQ(s) Frequently Asked Question(s) IBPS Interbank Payment System ICC International Chamber of Commerce IT Information Technology LC Letter of Credit NAPAS The National Payment Corporation iv of Vietnam SWIFT The Society for Worldwide Interbank Financial Telecommunication Techcombank TMA Vietnam Technological and Commercial Joint-stock _Bank _ Transaction Matching Application TSMT Trade Services Management TSu Trade Services utility UCP URBPO URC URR Uniform Customs and Practice for Documentary Credits Uniform Rules for Bank Payment Obligation Uniform Rules for Collections Uniform rules for Bank-to-Bank Reimbursements under Documentary Credits Vietcombank JSC Bank for Foreign Trade of Vietnam Table number Table 1.1 Table 1.2 Table name Page Elements in an Initial Baseline submission 10 List of ISO20022 TSMT messages used in aOF C2B LIST TABLES 13 transaction (to TSU) Table 1.3 List of ISO20022 TSMT messages used in a C2B 14 transaction (from TSU) Table 1.4 Comparing L/C and BPO in terms of the nature, 21 obligation arisen and transaction flow Table 1.5 Comparison of advantages and disadvantages of 25 Open Account, Documentary Credit and BPO Table 3.1 SWOT matric of deploying BPO at Vietcombank 41 Table 3.2 Brand value of Vietcombank in 2018 and 2019 42 Table 3.3 Changes in international settlement and trade finance 43 of Vietcombank from 2017 to 2019 Table 3.4 Some important financial indexes of Vietcombank 43 from 2017 to 2019 Table 3.5 Credit rating rank of Vietcombank by Fitch Ratings, 44 Moody’s and Standard & Poor’s from 2017 to 2019 Table 3.6 Exporting and importing volume of Vietnam in 2017 46 and 2018 (data of Ministry of Industry and Trade of Vietnam) Table 3.7 Exporting and importing volume of Vietnam in 2017 46 and 2018 (data of World Bank) Figure number Figure name Page Figure 1.1 Process of creating a Baseline 17 Figure 3.1 Survey about digitalisation trend in banking industry conducted by ICC in 2017 47 LIST OF FIGURES v vι INTRODUCTION RATIONALE OF THE STUDY Nowadays, a lot of methods of settlement are being used in international trade contracts In this study, they will be categorised into four major methods in the order of decreasing the risks of sellers They, named in the order of decreasing risks in the risk ladder to the sellers, are Open Account, Documentary Collections, Documentary Credit and Payment in Advance, and a company would choose a suitable method based on its particular situation Since the world is entering the era of digital, companies are making the transition from paper-based models to computer-based models Simultaneously, the booming of the international trade demands innovation in the processing a contract, in particular, a new, safe, yet time-saving and with a relatively low-cost method of settlement When companies first business with each other, it is almost universally that a term of Letter of Credit (L/C) is using as the payment term However, as the trust is built through the time, heavily reliant on paper-works method like documentary credit is losing it position, people refer other methods of settlements which are less complicated and with a lower cost Open account and documentary collection are cases of the point But they cannot maintain the security provided by banks as in using L/C, which is indeed hazardous when frauds are in its high-tech forms and cybercrimes cause troubles to modern trade To address these concerns, on the date of 17th April 2013, International Chamber of Commerce (ICC) released the Uniform Rules for Bank Payment Obligation (URBPO) It is used to govern the Bank Payment Obligation (BPO) - an irrevocable undertaking of a bank using digitalised documents instead of the physical ones For the first time, enterprises can use an open account payment with a guarantee of banks to get trade finances The transaction flow is speeded up and sellers no longer are exposed to the risk of non-payment Though first transaction using BPO took place is in the year of 2012 it took big bodies in banking and commerce such as SWIFT and ICC time to realise its - OPPORTUNITIES: Despite the positive outlooks that rating agencies gave to Vietcombank, the - As the world of trade is increasing both thelow volume and the average value of a credit ranking Vietcombank is indeed And that could be a disadvantage transaction, to the demand for a faster and safer method of settlement is go up too, and corporate expects more financing services the time for BPO prove its deploying BPO trade as foreign corporates willThat put isthese ranking into consideration value when Table 3.6 Exporting and importing volume of Vietnam in 2017 and 2018 (data of determinate whenever should or should not accept the BPO that has Ministry of Industry and Trade of Vietnam) Vietcombank as the Obligor bank - There is no short-term need of BPO, universities and colleges barely teach deeply about BPO and use the time for remain methods especially Documentary Credit People have to learn by themselves if they want to improve their knowledge of BPO - Synchronisation in technological infrastructure is also a problem not with only Vietcombank but banks in Vietnam Let take a payment system as an example Banks in Vietnam are using different payment systems at the same time They are Interbank Payment System - IBPS, clearance system, the payment system of NAPAS (the National Payment Corporation of Vietnam), payment system of banks and intermediary payment system Too much message types and standards is also an issue For example, SWIFT MT messages are used in interbank and international payment and remittance, ISO 15022 messages are used for payment in the stock market, card transaction use messages in compliance with ISO 8583 The different payment system uses different messages to communicate If Vietcombank wants to 2017 2018 transmit a message to NAPAS, the45message must follow the ISO 8583 Exports 214.02 (+21.21%) 243.48 (+13.24%) Imports 211.10 (+20.83%) 236.69 (+11.14%) 2017 2018 Exports 214.32 245.64 Imports 211.52 244.20 (Source: Ministry of Industry and Trade of Vietnam, Export - Import Report of Vietnam 2017, 2018) Table 3.7 Exporting and importing volume of Vietnam in 2017 and 2018 (data of World Bank) (Source: World Bank 2017, 2018) ICC conducted a survey in 2017 about digitalisation trend in banking field The question is about removing the use of physical paper in their bank, the result is recorded as the chart below: 46 ■ To no extent, not implemented at this time ■ To some extent, implemented for some transactions ■ To a great extent, fully implemented for all Figure 3.1 Survey about digitalisation trend in banking industry conducted by ICC in 2017 (unit: %) - It can be seen that the process of document verification is a notable laggard when it comes to the digitalising transaction BPO could solve this issue as in a BPO a centralized matching engine is used instead of human for checking documents - ISO develops a separate set of the standard used only for BPO that is ISO20022 TSMT With this international standard, all BPO transaction will be synchronized through the world, which makes a BPO transaction raise fewer disputes Fewer disputes mean less cost and less time wasted The efficiency of corporates and bank will be improved THREATS: - As required in the URBPO, involved banks in a BPO operation must use the same TMA Therefore, the deployment of one bank depends on the deployment of their counterparty The dependence could create a vicious circle of problem In the Open Account transactions, banks take the responsibility of remittance only so the investment is limited In Documentary Credit, banks need to improved the communication system as the message used must follow a particular standard, such as MT 700s messages International payment 47 specialists also need to enhance their professional skills To operate a BPO transaction, the bank first must obtain permission to use a TMA, for example, the TSU of SWIFT Banks as well as must improve the IT infrastructure to adopt the ISO20022 TSMT standard Vietcombank should consider the initial cost before decides whether to deploy or not yet to deploy the BPO In the world, there are just 21 banking groups (18 of them are top20 trade bank- a ranking based on Cat traffic) with over 60 corporate relationships live on BPO/TSU, 22 other groups are in the testing stage - Even if Vietcombank fulfils all above requirement, there is still one factor they must consider That is the demand of customer to use the BPO If the customers not understand the BPO clearly, they would never realise how much benefit they could get from using BPO In Vietnam, whenever saying about the method of payment for an international trade transaction, corporations all mention using Open Account and Letter of Credit, or Documentary Collection BPO is barely mentioned Banks could affect corporations’ thoughts by promoting the BPO to their customer, however, the final decision is the customers to make But it is not to say that the bank should wait until when their customers ask whether the bank provides BPO or not to start the BPO project Banks are better to early prepare 3.2 RECOMMENDATIONS TO USING BPO IN VIETNAM 3.2.1 Solutions for BPO implementation To deploy BPO successfully in Vietnam, commercial banks need to at least solves the problems of improving technology infrastructure, enhancing human resources in the BPO plan, sparing the advantages and superior points of BPO to capture the attention of the customer, dealing with the law and updating news about the BPO implementation of correspondent banks It could be seen that in Vietnam, at this moment, Vietcombank is walking in the right direction to address the issues of technology and human resources Other commercial banks could learn from Vietcombank to deploy their solutions The following will write about what Vietcombank has been doing to complete its BPO implementation project 3.2.1.1 For technology infrastructure 48 Vietcombank started a new big project using technology in 2019 which are the new Core Banking System project, digital transformation and PCM project (Payment Hub and Cash Management project) All the above plans could indeed give the effects on the possibility of deploying BPO of Vietcombank, this study will focus on the on that has the most direct influence - Payment Hub project Stated on 14 November 2019, Payment Hub could complement the internal payment system of Vietcombank, as well as improving the risk management works by using ISO20022 standardised messages By applying ISO20022 messages into its operations, Vietcombank is starting to standardise its internal payment, which helps significantly increase the speed of handling payment and efficiency Payment Hub allows a bank to build their payment service which can integrate with multiple systems and channel A true payment service hub needs to be able to support all the core payment processing functionality throughout the entire lifecycle of a payment transaction If Vietcombank successfully implements a payment hub, that would be a big step on the process of digital transformation and bring great competitive advantages to Vietcombank There are two possibilities could happen with the ‘gap’ of automating progress The first possibility is that they still use physical documents and employee will take data from these documents by hands In this case, they could use software to scan a document then automatically transfer the image into the data and fill the messages like the akaDoc software of FPT Software akaDoc is an intelligent platform for capturing data from mass documents, the by using it, sellers and buyers or banks themselves will have data extracting automatically and without errors The second possibility is that digital documents and digital data are approved by law and legal documents to be broadly used in transaction and payment This possibility will be discussed in the next part of the suggestion 3.2.1.2 For the human resource To address the problem of lacking high quality and experienced employees taking part in projects, Vietcombank, as well as some other banks such as Techcombank, established their training centre for employee training and 49 development This solution is not only to satisfy the need of skilled staffs for a big project but as well as daily operation service In the training school of Vietcombank, there was over 31,000 training turn with 13,000 tests that were completed in 2018 Vietcombank also created an E-learning system with virtual classrooms which helped learners quickly get familiar with the real working procedure In May 2019, that the learners of the school took part in the transformation plans of Vietcombank such as ERP, CLOS, TF, Core Banking and so on, and brought positive results (V.Nga, 2019) 3.2.1.3 For awareness of corporates Last but not least, commercial banks in Vietnam need to consider its customer’s attitude to its plan of deploying BPO One the one hand, BPO has competitive low fee compared to L/C, so contracts that have small value could use BPO instead of L/C and still get the payment guarantee of banks On the other hand, as different banks could be the Obligor banks, it opens a chance for very big volume transactions gets payment in a relatively short time, which hardly happen with an L/C So potential customers of BPO could be both SMEs or a big corporation Two types of customers make Vietcombank have to have different strategies to approach and introduce their services With SMEs, for example, an exporting company, guarantee of a bank with a low fee and pre-ship finance could be the competitive advantages of BPO that should be introduced to the customers While with big companies, a contract of them usually has big value then BPO of multiple banks would be a solution If the company uses L/C then the time they have to wait, for example with a L/C of 10 million US dollar, usually a year to receive all the money while by using BPO, the time could be cut down significantly Banks could utilise the functions of TSU to provide the relating services Some potential banking services about finance are purchase order finance, Invoice finance, pre/ post-shipment finance, forfaiting data matching, asset securitisation About risk management, there are third party risk insurance, electronic collections, automated Letter of Credit process, improved operational risk and conditional payment The TSU is also used for working capital management such as cash flow 50 management; for insourcing such as TSU services to correspondent banks, confirmed payment collection, accounts payable or accounts receivable and corporate document preparation; and for information and other services such as purchase order data confirmation, reconciliation, netting, market intelligence, event tracking, country risk management and currency exposure management Finance and risk management could be considered as the most two functions of the TSU beside the matching data ability (Proctor, 2005) Together with the policies to improve technology basement and human resources, banks in Vietnam could start their BPO project by (i) defining the BPO project team: the team should include department of manufacturing, sales, accounting, legal, IT and back offices, (ii) register to TSU: as an estimation of SWIFT, this action could take weeks to complete, (iii) taking BPO training: getting used to the interface of the TSU, identifying BPO prospects, developing services related to BPO transactions, establishing a form for BPO customer agreement and operating initial transaction with clients and correspondent bank, and (iv) going live using the TSU-interface 3.2.2 Suggestions The problem with the law is that at the moment, Laws on Customs of Vietnam (Law No 54/2014/QH2013, On Customs) does not approve the legality of electric document, even though there are Decree No 35/2007/ND-CP On the banking e-transactions and Decree No 165/2018/ND-CP “Về giao dịch điện tử hoạt động tài chính” recognised the authenticity of the electronic signature and electronic document It means that L/C, the most important documents in the set of payment documents, cannot be issued in the electronic forms and used to clear the customs It could be a reason for that there are no agencies in Vietnam releasing eB/L eB/L used if any are usually issued by the essDOCs or Bolero, both have not yet appeared in Vietnam This needs a few modifications in the Law on Customs to create space for electronic Bill of Exchange The approval of the law, especially B/L and commercial law like commercial invoice need to done as soon as possible 51 3.3 CONCLUSION 3.3.1 Achievement This study defined what is a BPO and governing rules to BPO The study also clears some terminologies in the URBPO which is the voluntary rules to BPO The study offers a general knowledge about the requirement to implement BPO and explain why there is a small number of banks already deployed BPO By analysis SWOT matric of Viecombank, the study pointed out the limitation and weakness need to be improved to successfully operate a BPO transaction and suggested the solution to resolve them 3.3.2 Limitation As having no direct using experience of the TSU, the author cannot write deeply about the interface and how to use the TSU This section of knowledge could be obtained from Trade Service Utility 2.0 Interface User Guides issued by SWIFT SWIFT also offers support after a bank register for the TSU The study takes the information published on the website of Vietcombank and other sources on the Internet due to the limitation in approaching the internal data of Vietcombank It could fail to give a comprehensive look at the international settlement and trade finance activity of Vietcombank 3.3.3 Further research The limitation could suggest further research For example, the next research could take the implement of BPO in Vietcombank as the main objective and analysis in a more detail way about technology base, human resources and reality of international settlement and trade finance activity of Vietcombank 52 CONCLUSION OF THE CHAPTER THREE The government encourages companies to digitalise its operation, so it would be an advantage for any commercial banks or enterprises who want to utilise the value brought by using BPO Though deploying BPO is inevitable, due to the lack of infrastructure as well as the difficulties caused by relating laws, BPO and its services could be hard to implement in the next five years One more important element is the awareness of companies using the services of the banks If being thoroughly introduced about BPO and its superiors than other methods of settlement, it is confident to say that BPO would be welcomed in Vietnam This chapter also presented a list of elements in the SWOT matric of deploying BPO in Vietcombank 53 CONCLUSION This subject was selected because of the rising need for digitalisation in the banking section, especially in international settlement and finance The existing methods of payment could be appropriate in the next few years but many drawbacks could be improved BPO, a product of technology that is considered as “the 21century” finance product, is the one that could solve the problem The study of “Using Bank Payment Obligation, lessons for Vietnam” aims at determining the requirements of deploying BPO and then suggest solutions to commercial banks in Vietnam after analysing the situation at the moment of the banking section In the first chapter, the thesis presents about the basic knowledge about BPO, from its definition, popular terminologies that could be met when reading BPO related documents, to its distinguishing characteristics compared to other methods of settlement such as Open Account or Documentary Credit Chapter two is about the situation of deploying BPO in Vietnam and challenges that a commercial bank in Vietnam could face in the process of implementation These challenges come from mainly technology infrastructure, human resource, law and legal documents, awareness of corporates and implementation of correspondent banks Chapter three writes about the development orientation of BPO in Vietnam to 2025 and attempts to resolve the problems mentioned in chapter two by recommendations and suggestions As Vietcombank is now the leading commercial bank in Vietnam, this chapter first goes deeply to asset the possibility of deploying BPO in Vietcombank by using SWOT matric The following half of chapter three is about the solution, about technology basement, improving human resources, and suggestion of changing some requirement in Law on Customs of Vietnam to create space for BPO to develop The study cannot avoid having the defects as a limitation in both time and access to documents, therefore constructive comments and additional ideas will always be welcomed to complete the study 54 REFERENCES RESOURCES Books Vietnamese language sources: - Dinh Xuan Trinh (2018), Phương thức toán BPO thay L/C Hướng dẫn áp dụng quy tắc thống nghĩa vụ toán ngân hàng, 1st edn, Lao Dong Publisher, Hanoi - Nguyen Van Tien & Nguyen Thi Hong Hai (2019), Giáo trình Thanh tốn quốc tế tài trợ ngoại thương, Thong ke Publisher, Hanoi Journal articles Foreign language sources: - Matthew V Raketti (2015), ‘The Bank Payment Obligation: A vehicle for the electrification of commercial Letter of Credit?’, Documentary Credit World, Nov/Dec 2015, pp 38-47 - Geoffrey L Wynne & Hannah Fearn (2014), ‘The Bank Payment Obligation: Will it replace the traditional Letter of Credit - now, or ever?’, Butterworths journal of International Banking and Financial Law, Feb 2014, pp 102-104 Vietnamese language sources: Nguyen Huu Duc (2015), ‘Liệu BPO kết thúc “triều 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UCP URBPO URC URR Uniform Customs and Practice for Documentary Credits Uniform Rules for Bank Payment Obligation Uniform Rules for Collections Uniform rules for Bank- to -Bank Reimbursements under... the imperfections Therefore, I look forward to comments from teachers and the judgement council Student i DECLARATION I assure that ? ?Using Bank Payment Obligation, lessons for Vietnam” is an independent... Commerce (ICC) released the Uniform Rules for Bank Payment Obligation (URBPO) It is used to govern the Bank Payment Obligation (BPO) - an irrevocable undertaking of a bank using digitalised documents